Institute for Social and Economic Change

Established in 1972 by Professor V K R V Rao, ISEC is an All-India Institute for Interdisciplinary Research and Training in the Social Sciences

Repayment of Short Term Loans in the Formal Credit Market: The Role of Accessibility to Credit from InformalSources – isec

Repayment of Short Term Loans in the Formal Credit Market: The Role of Accessibility to Credit from InformalSources

Abstract

This paper is an attempt to link the problem of non-repayment in the formal credit market with the accessibility to credit from informal sources. In many developing countries a well established network of informal lenders continues to prevail in spite of various formal lending programmes implemented by the government. Scholars often dealt with how the poorer households become the victim of usurious rates of interest charged by informal lenders and lose their valuable properties. We however show that more unfavourable the terms of loan from a moneylender compared to that of a formal lending agency, better is the chance of a borrower making timely repayment and get the benefit of formal loan on a recurring basis, which is not available in case of default. After establishing the conditions theoretically, the paper using National Sample Survey Organisation (NSSO, India) database, empirically tries to examine such an impact in the case of short term formal loans. The empirical analysis reveals the positive and significant impact of informal interest rates on repayment of formal loans.

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